On Inflation Hedges And Charter Flexibility

Yesterday, the NCUA continued a trend of interpreting its regulations to increase the ability of credit unions to serve people who want their services. What a concept.

Most importantly, it approved a revision to its chartering manual that will increase the size of rural areas that can be served by community chartered credit unions. Currently, the size of such communities is capped at 200,000, but under the new regulation such communities can be the greater of either 250,000 people or 3% of a state’s population. The Association pointed out in its comment letter in support of this proposal that its promulgation will mean that New York’s community charters will be able to expand the size of their rural community service areas to approximately 583,000 persons. But even more important than the actual size of a given rural community, as anyone who has walked around places like Auburn, NY knows, rural communities often are anchored by one relatively large town or city that skews an area’s fundamentally rural character. NCUA hopes, as do I, that passage of this regulation will allow more credit unions to cost effectively provide services to areas in desperate need of institutions willing to provide financial services.

Keep in mind, however, that this regulation simply changes the population criteria for a rural community’s designation. That means that credit unions will still have to show that an area satisfies additional criteria before setting up or expanding to a rural community. For instance, the area must still have well-defined contiguous boundaries and either more than 50% of its population must reside in an area that the U.S. Census Bureau designates as rural or it must have a population density of no more than 100 people per square mile. This means that even though the American Bankers Association commented against the expansion, banker nightmares of community chartered credit unions proliferating across an entire state (God Forbid) are not going to come to pass anytime soon.

As for the inflation hedging part of this post, NCUA also approved a regulation permitting credit unions to invest in Treasury Inflation Protected Securities (TIPS). According to the U.S. Treasury’s website, the principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Obviously, in today’s low inflation-rate environment, it wouldn’t be prudent to rush out and buy a bunch of these babies, but NCUA has sounded the alarm for a while now about a potential spike in inflation and these securities give credit unions one way to mitigate such a spike when and if it occurs. By the way, at a recent town hall meeting, Chairman Matz indicated that NCUA will be approving limited use of derivatives to help credit unions guard against excessive reliance on mortgage interest. This proposal is long overdue and my only hope now is that NCUA finalizes the proposal in time for it to be of value to credit unions.